Are Islamic Windows More Efficient Than Full-Fledged Islamic Banks? Panel Evidence from Five Dual-Banking Countries

This paper investigates whether Islamic windows - Shariah-compliant divisions operating within conventional banks - deliver superior financial performance relative to full-fledged Islamic banks. Using a quarterly panel of 394 observations spanning 2014Q1–2023Q4 for five established dual-banking jurisdictions (Indonesia, Malaysia, Oman, Pakistan, and Saudi Arabia) drawn from the IFSB Prudential and Structural Islamic Financial Indicators (PSIFIs) database, the study estimates pooled ordinary least squares regressions with country fixed effects and heteroskedasticity-robust standard errors. The empirical results reveal that, after controlling for bank size and asset quality, Islamic windows exhibit a 30.5 percentage point lower cost-to-income ratio, a 28.3 percentage point higher net profit margin, a 0.74 percentage point higher return on assets, and a 0.76 percentage point lower non-performing financing ratio relative to full-fledged Islamic banks. All four differentials are significant at the 1% level. The findings are robust to the inclusion of country-level controls and remain stable across alternative specifications. The results carry direct policy implications for emerging Islamic finance jurisdictions, particularly Uzbekistan, where Law LRU-1126 (adopted 27 March 2026) has formally enabled the establishment of Islamic windows in commercial banks.